MaxSpeaks About Delphi Auto Parts

Max Sawicky on Delphi:

MaxSpeak, You Listen!: DECLARING WAR ON RETIREES: The public does not usually turn to the CEOs of bankrupt companies for wisdom, but Steve Miller, the CEO of Delphi, hopes to change this pattern. Mr. Miller warned that Delphi's bankruptcy is a foretaste of "inter-generational warfare" as the interests of the current generation of workers is pitted against the interests of retirees.

Since the punditry will no doubt applaud Mr. Miller's courage, let's get some facts on the table. Delphi did make generous commitments to earlier retirees. Of course it also paid substantial sums to shareholders in the form of dividends and also paid rich salaries to its top executives. In principle, Delphi's current workers could go to war against either Delphi shareholders or its higher paid managers to keep their current paychecks. They could require them to repay some of the dividends or fat salaries earned over the last two decades. But, Mr. Miller and his colleagues have set up institutional structures that leave the incomes of these groups beyond the reach of Delphi's workers.

In this way, Mr. Miller can tell the current generation of workers that the only place to get their paychecks is by taking back the benefits that retirees have already worked for. Were the benefits too generous? Believers in a free market don't ask such questions -- the benefits were part of a contract and would be honored by any honest libertarian. However, the law is structured so that many retiree benefits can be retaken (most importantly health care coverage) even as the past salaries of the executives that drove Delphi to bankruptcy remain beyond reach.

It is also important to note that much of the "inter-generational war" is attributable to the fact that the United States has by far the most inefficient health care system in the world. We pay more than twice as much per person for health care, yet rank last among rich countries in life expectancy. If the U.S. health care system were as efficient as the Japanese, Canadian, or even the French system, Delphi might not even be filing for bankruptcy. Unfortunately, the people who hold power in this country won't let health care reform be discussed. They would rather tell young workers to beat up on their parents and grandparents.

At the corporate-structure level, the big problem is that retirees (like workers, stockholders, and bondholders) have claims on corporate cash flows. Workers' claims at a company like Delphi are secured by the fact that if they don't show up, nothing gets made and there are no cash flows: Delphi's jobs are very highly-skilled indeed, and replacing any significant chunk of the workforce with people off the street is not a realistic option. Stockholders' claims are secured by the fact that they vote for the executives of the company--and can throw out the executives if they don't like what the executives do. Bondholders' claims are secured by their ability to throw the company into bankruptcy if they are not satisfied and by bankruptcy judges' mandate to protect their interests.

Retirees have claims on cash flows but no institutional mechanisms to secure their power if things go south--save for the fact that the PBGC will step in and cover some of their pension costs.

This is a big problem.

Comments

[Miracle Max]

N.B., this post was written by my smarter co-blogger, Dean Baker.

[save_the_rustbelt]

What about creative destruction?

Destroying these jobs is good for the economy, right?

Oh, there are people involved, gosh, we forgot that.

Let them eat cake?

Liberal economists have no moral authority to complain about what is happening to Delphi workers...... and how many Chevys are in the faculty parking lot?

[Ginger Yellow]

In the UK the new pensions regime means that trustees of a defined benefits pension scheme can force a company to make right any deficit when a company wishes to close the scheme. The trustees can even claim cash from persons and companies "associated" or "connected" with the scheme operating-company. Furthermore there is a pension protection fund, financed through levies, which would make up any shortfall following bankruptcy (with moral hazard provisions, of course). I'm not in a position to judge whether the new regime will work, but it does seem to give retirees the leverage you're talking about.

[anne]

http://www.nytimes.com/2005/10/10/business/10delphi.html?ex=1286596800&en=c95d41baeed3b651&ei=5090&partner=rssuserland&emc=rss

October 10, 2005

With Delphi Filing, Tougher Times for Auto Industry Workers
By DANNY HAKIM

DETROIT - When Delphi, the nation's largest auto supplier, filed for bankruptcy on Saturday, it was the latest blow to the American auto worker's gilded age.

Ninety-one years ago, Henry Ford shocked corporate America by abruptly announcing that he would roughly double his workers' average wages, to $5 a day. For the first time, many Ford line workers could afford the Model T's they were assembling.

In recent decades, once-powerful labor unions like the Teamsters and United Steelworkers and, most recently, airline workers have been in retreat. At the same time, the United Automobile Workers, Delphi's largest labor union, has maintained some of the highest wages and most generous benefits in industry, even as its membership has been cut in half since the 1970's.

But the bankruptcy filing will be a major test.

"It is a crossroads," said Gary N. Chaison, a professor of industrial relations at Clark University in Worcester, Mass. "These were the aristocrats of labor, and now they're in the position that their jobs are going to become lower-wage manufacturing jobs, as if they were producing hairdryers."

"The ramifications from Delphi are going to be tremendous," he added. "The union is going to have to assume a defensive position, and this is a union that's used to being on the offensive."

The challenge comes as the A.F.L.-C.I.O., which includes the auto workers' union, is going through an identity crisis. A few prominent unions have recently split from its ranks in a dispute over how best to salvage the labor movement. Should the U.A.W. be forced into major concessions for Delphi, or should the bankruptcy court force a sharp cut in wages and benefits, it would influence the U.A.W.'s negotiations with General Motors, Ford and the Chrysler division of DaimlerChrysler to replace its labor contract, which expires in 2007.

Delphi, a division of G.M. until 1999, is seeking to cut pay for its 34,000 unionized workers by as much as two-thirds, to as little as $10 an hour. One union local pointed out in a letter to its members that at those wages, they could no longer afford to buy the new cars that contained the parts they produce.

"You couldn't even afford the gas," Douglas A. Fraser, the former president of the U.A.W., said in an interview on Saturday. "The guys, particularly the veteran guys, are willing to do something, but not completely emasculate the agreement." ...

[Jason]

I would like to point out that in our "new economy" 10 USD per hour is considered a pretty fair wage by a large majority of people, and *many* workers make far, far less. In most *Red* and *rural* areas, that is a tidy sum indeed. The unions are fighting a losing battle in that they won't have widespread support for their resistance to wage cuts, as many people make far less than these guys will even AFTER the proposed Delphi wage/benefit cuts. Labor aristocracy indeed. The unions need to reach out of their comfort zones and ORGANIZE workers in lower wage and service occupations, which would sure help negotiations for the higher wage workers. Labor has forgotten that there is strength only in numbers.

[Jason]

I would like to point out that in our "new economy" 10 USD per hour is considered a pretty fair wage by a large majority of people, and *many* workers make far, far less. In most *Red* and *rural* areas, that is a tidy sum indeed. The unions are fighting a losing battle in that they won't have widespread support for their resistance to wage cuts, as many people make far less than these guys will even AFTER the proposed Delphi wage/benefit cuts. Labor aristocracy indeed. The unions need to reach out of their comfort zones and ORGANIZE workers in lower wage and service occupations, which would sure help negotiations for the higher wage workers. Labor has forgotten that there is strength only in numbers.

[Cal]

We are on the cusp of the next great rape of the American taxpayer to cover the sins of the moneyed and managerial classes. How about this solution: no stock options can be exercised unless the pension liability is 105% funded. No insider stock can be sold unless the pension liability is 105% funded. No stock or options grants unless the pension liability is 105% funded. Funded means cash and or securities in an amount 105% of pension liability. The securities must be diversified and managed by someone or some company that has no ties to company management. If stock or options are sold or exercised while pension liability is under funded (under 105%), then it can only be done so by court order as part of a personal bankruptcy of a manager in question (no assignment for creditors) and the sales are taxed at a rate of 50%. But this doesn't even address the abuses done in the past; management simply got away with it.

[howard]

sheesh: i'm reduced to quoting Edward Heath, for goodness sake! this is absolutely the "unacceptable face" of capitalism.

no one forced the management of Delphi to make the promises they did with respect to pensions. Now that those promises are being broken, will a single former member of Delphi management pay any price at all? After all, the alternative to pensions was simply to pay workers more at the time; by instead offering the prospect of pensions in the future, management made the bottom line look better than it otherwise would have been.

[howard]

Cal, i like your approach!

[pebird]

Why is it most of this inter-generational warfare is instigated by those who don't have to battle.

Maybe it isn't really inter-generational warfare, but something else. Hmmmmmm.

[save_the_rustbelt]

"no one forced the management of Delphi to make the promises they did with respect to pensions."

This package was put together by GM, and I think they knew Delphi would be bankrupted when they did the spinoff (1999).

This allowed GM to dump billions in liabilities (maybe) and thousands of workers. Also, a good excuse to go overseas.

The current management of Delphi signed on to a sinking ship. Whether they are dumb or brave is a matter for discussion.

GM is the monster here (aided and abetted by the UAW).

[johnchx]

Private pension plans say, in effect, "I will gladly pay you twenty years from now for the work you do today." To which only the sane answer is, "I'd prefer to be paid today, thank you very much."

Employees with "pensions" have allowed themselves to become de facto unsecured lenders to their employers. They are lending very-long-term (20 - 40 or more years), with little evaluation of the creditworthiness of the borrower, with no liquidity (i.e. there's no secondary market for my employer's pension obligation to me), and with no diversification. No wonder they get burned.

[Michael Cain]

Cal: "How about this solution: no stock options can be exercised unless the pension liability is 105% funded. No insider stock can be sold unless the pension liability is 105% funded. No stock or options grants unless the pension liability is 105% funded. Funded means cash and or securities in an amount 105% of pension liability. The securities must be diversified and managed by someone or some company that has no ties to company management."

I worked for a giant company with a long union history and the separation of managers was not necessary -- the pension fund was in an irrevocable trust (ie, the company could get their hands on the money only if all retiree obligations had been completely discharged) and the managers' primary fiduciary responsibility was to the beneficiaries of the trust rather than the company. The potential civil and criminal penalties for failing to manage the trust well (or for attempting to subvert the trust managers) seemed to be sufficient to keep things in line. Interestingly, post-2001 the fund did go from considerably overfunded to just about break-even, but that was a result of low Treasury rates (used for discounting) inflating the NPV of future benefits.

The aggregate underfunding by US companies is reported to be on the order of $400B. Any requirement to bring pension funds up to 105% of obligations over a short period will force many companies into bankruptcy. If you are interested in protecting the retirees' income, the first step must be to put the pension fund at the top of the creditors' list in bankruptcy proceedings. I suspect that one unintended consequence of such a step would be to force companies that now file Chapter 11 into Chapter 7 proceedings instead.

[Slocum]

"In principle, Delphi's current workers could go to war against either Delphi shareholders."

They can't go to war with the shareholders because the shareholders are already dead -- with the Chapter 11 filing, Delphi shares are now effectively worthless paper.

I suggest a thought experiment. Imagine that the UAW was allowed to appoint the CEO and entire boards of Delphi and GM. Now, what could they do to protect the pay packages of current employees and also retiree pensions? Delphi has been losing hundreds of millions of dollars and GM has continued to hemmmorhage market-share. Delphi can't turn a profit now with what it's charging for its parts and GM can't compete successfully paying Delphi prices for those parts. I suppose the hypothetical UAW management could clamp down on executive compensation. This might make everybody feel better, but would do little to improve the financial condition of the companies and would accelerate the loss of talent (I live in Michigan and know some white collar auto employees. You think they aren't keeping their eyes out for a nice secure job at Toyota?)

Even protectionism wouldn't do much for Delphi and GM because they're competing with (and losing to) the transplants with their young, non-union workforces and much lower medical and retirement costs.

[save_the_rustbelt]

The UAW leaders who watched this happen for two decades have to take some of the blame, they negotiated long-term benefits and didn't bother to notice there would never be enough cash flow to cover the promises.

Also, we need to "clawback" all compensation, especially retirement and deferred compensation, to any executive with plan responsibility when the plan is dumped on the government. For once, turn the trial lawyers loose.

[lise]

So, the problem then is workers who did all they could and all they were asked to build this country's vehicles? Huh???

[anne]

http://www.nytimes.com/2005/10/11/business/11york.html?ex=1286683200&en=72d8177d6a86a587&ei=5090&partner=rssuserland&emc=rss

October 11, 2005

For Big Three, All the Signs Are Warnings
By DANNY HAKIM

DETROIT - Jerome B. York is looking over Rick Wagoner's shoulder, and that should make Mr. Wagoner nervous.

Mr. York, 66, is the point man for Kirk Kerkorian, the billionaire financier who in the last few months has become one of the largest shareholders in General Motors; Mr. Wagoner is G.M.'s chairman and chief executive.

Many analysts say they believe that Mr. York's emergence has put Mr. Wagoner's job security on the clock, because neither Mr. Kerkorian nor Mr. York is known for sitting on his hands. They are, in fact, reprising their roles of a decade ago, when Mr. Kerkorian was Chrysler's largest shareholder and turned to Mr. York to be his right-hand man in what became an unsuccessful and contentious takeover bid.

A spokeswoman for Tracinda, Mr. Kerkorian's private investment firm, said Mr. York would not comment for this article.

But several of G.M.'s assets are viewed as potentially expendable, people briefed on the situation said. Among them are parts of the General Motors Acceptance Corporation, G.M.'s large financial services division, including its insurance business and its mortgage business, pieces of which it has already sold.

The Saab brand is thought to not be worth further investment. Hummer is not seen as a core asset but one that should be sold.

And while there is an appreciation of the difficulties that G.M. faces, Tracinda is not expected to remain on the sidelines unless the company comes up with a more comprehensive turnaround strategy that refocuses G.M. on making fewer, but more desirable, car and truck models.

Tom Kowaleski, a spokesman for G.M., declined to comment on the company's relationship with Tracinda, but referring to Saab and Hummer, he said, "We believe both of those brands are core to our growth and our ability to bring in non-G.M. customers." Through the first month of sales of the new Hummer H3, 70 percent of the buyers have never been G.M. owners before, Mr. Kowaleski said.

Gerald C. Meyers, a professor at the University of Michigan business school, said of Tracinda, "If they think they're going to lose a big chunk of their investment, they'll be quite vocal, and there will be a sense of urgency."

At different times, both Mr. York and Mr. Wagoner have taken part in corporate role-playing exercises Professor Meyers has organized for his business school students.

"He cuts through like a surgeon," Professor Meyers said of Mr. York, who is a former chief financial officer of both Chrysler and I.B.M. "If you have a pile of numbers, he'll get right to the heart of things in a hurry, and he can make it hurt. Should Wagoner be worried? If the numbers don't speak friendly to a guy like York, it will become embarrassing. If you respond well to him, he can be a help."

G.M.'s standing was greatly complicated over the weekend by the bankruptcy filing of its former parts division, Delphi. G.M. agreed in its 1999 spinoff of Delphi to pay much of the medical, pension and life insurance benefits of Delphi retirees if the company filed for bankruptcy. G.M. said on Saturday that the filing could add as much as $11 billion to its future liabilities, more bad news for a company awash in red ink this year.

On Monday, reacting to the Delphi news, Standard & Poor's cut G.M.'s debt rating to BB-, three notches below investment grade, while Bank of America downgraded its rating on G.M.'s stock to sell. G.M. has already been battered by plummeting sales despite spending heavily on discounts, and its product lineup relies on sales of big sport utility vehicles and pickup trucks at a time when Americans are being pinched by gas prices....

[ken melvin]

The $65/hr labor cost Delphi quotes includes paying benefits to retired workers because the money for those benefits was pissed away long ago as phony income which I doubt Delphi payed taxes on it anyway. I'm guessing that within a year GM will declare bankruptcy for all the same reasons as Delphi, United, Delta, ...

[Esq.]

There is a simple way to make sure that there are no unfunded pension liabilities.

Amend the bankruptcy code to provide that pension liabilities trump secured lenders. Trustees can already force a "carve out" from secured creditors for administrative expenses. Give the pension guarentee board the same authority. There is a takings issue, but that would be solved by making it going forward, in other words the pensions would only have priority over future disbursements.

No company that hasn't fully funded its pension will ever get a loan again.

My favorite is when debtor corps set the motion to approve bonuses for management for hearing on the same day the motion to cut pensions or avoid union contracts is scheduled. My understanding is that the Southern District and Del. NEVER deny the motions for retention bonuses.

[save_the_rustbelt]

"So, the problem then is workers who did all they could and all they were asked to build this country's vehicles? Huh???"

No, but the very well paid union leaders let down the working stiffs, repeatedly.

[bakho]

Rustbelt was correct in his previous post about Delphi being spun off by GM. Will GM do more spinoffs to save itself? One trick by corporate management is to set free non-profitable divisions to be on their own and load them down with liabilities in the process. GM is only making money on its largest vehicles. GM has lots of shops making small cars that can be "set free" with assets (so what if they lose money) and a significant share of pension liablility. Some corporations will "set divisions free" with the assets of the mother corporation to be purchased over time by the independent division. This absolves the mother company from liability and may even give it some claims if bankruptcy ensues.

UAW needs to figure a new way to negotiate retiree benefits so they are paid upfront (Perhaps a retirement account to pay Medicare Supplemental). Many older retirement contracts are based on the corporation continuing to exist well into the future. Many of the steel retirees now only have SS benefits after many of the steel companies have sunk. The unions can no longer depend on the government to enforce pension regulations and protect their retirement. This means that the unions need to seize control of the money, pay as you go. Of course this will be more expensive for companies with union workers, but didn't they bring it on themselves?

[Jonathan W. King]

Speaking of people who should only be making $10 per hour, I vote that we put stock analysts in that category. Take a look at this:

http://finance.yahoo.com/q/ao?s=DPH

The last SIX changes in analyst opinion were all upgrades. That said, the situation apparently was something of a game of chicken. Delphi was sure that GM woudln't force them to declare bankruptcy, since that would put GM in line to pay as much as $11 billion. I'm guessing that what they didn't know was that GM doesn't really care about the $11 billion, since they'll almost certainly be filing under chapter 11 themselves whenever it is most convenient. If consumer sentiment is still down in the 70s when that happens, I wonder if that alone could trigger the next recession?

[Jake McGuire]

Do the "hall" unions (eg: steelworkers) administer their own pension funds? And wasn't the big UPS strike a while back largely over who got to control the pension fund, with the union eventually ending up with it? I remember thinking at the time that it seemed like a silly thing to fight over, but I can't say that I think that any more. Is their fund appreciably more solvent than anyone elses?

Moving pension funds up the seniority chain for debts sounds superficially attractive, but it seems like there'd be some number of companies out there that would be immediately driven into bankruptcy, as they defaulted on their currently secured debts. Anyone care to guess how many?

[snort]

In the Great Unraveling of 2006 most pension funds become seriously underfunded as the underlying securities lose their value. By 2007 the minimum wage is waived in a desperate attempt to get people back to work. The PBGC, of course, is stripped bare and mainly serves as a conduit for fractional payments when Congress is able to find the funds.

[William]

$1.66

That's the entire amount of Dividends that Delphi paid out since it was spun off from GM.

http://phx.corporate-ir.net/phoenix.zhtml?c=105758&p=irol-dividends_print

And in exchange they lost their entire investment. So go ahead and ask for those dividends back. Doesn't change a damn thing. This crazy belief that somehow the shareholders came out ahead as they were "paid substantial sums" in the form of dividends is mind boggling. Is this a lie or simply a mistake...or does Mr. Sawicky believe that putting in 12 dollars and getting back $1.66 is a substantial sum?

[a]

Didn't this intergenerational war begin with lowering interest rates to below the inflation level? When interest rates are low, people borrow to invest. The (real) rate of investment falls. It becomes harder for people to save and to make their savings pay.

[Ragout]

From the point of view of stockholders, GM should spin off their profitable business (financing, Asia) and leave the unprofitable business with the obligations to Delphi and the retirees. Even better if they can transfer their billions in cash to the spin-offs. The rump GM can then go bankrupt and renege on their promises. I don't know if GM can legally do this, but I bet they can.

I was under the impression that this was all solved in the 1980s, after the previous wave of companies breaking their promises their retirees. But I guess I was naive.

[Slocum]

"There is a simple way to make sure that there are no unfunded pension liabilities."

"Amend the bankruptcy code to provide that pension liabilities trump secured lenders. "

As you suggest, this would mean that companies with underfunded pensions would never get another loan. The problem is that 'underfunded pensions' is a judgement call. Defined-benefit plans promise a particular level of benefits, but how much money is needed for the plan to be 'fully funded' varies enormously according to what kind of assumptions one makes about returns on pension fund investments. GM has had to pump billions into its pension fund in recent years because returns on pension investments have dropped. If you create a legal situation where there is no such thing as a 'secured lender' to troubled companies, you'll force all of them into bankruptcy.

[Stuart]

Having recently been put out of work due to bad management, this discussion strikes a chord with me. Some good points have been made about structural changes to pension funds to better ensure there solvency; however, the most pressing issue is how to better ensure intelligent management. I'm currently looking for work because the executives of my former company, two owners prior, drank too deeply from the merger and acquisition kool aid during the late '90's, much to the dismay of their bottom line. Our profitible little division was spun-off to a competitor to try and remedy some of that ill-conceived debt accumulated in the name of "growth", only to find ourselves in the same boat with our new owners. Much of our operation was consolidated out of existence by the new owner, partly from overlap but also because they found themselves in a similar position to the prior owner...over-extended by trying to buy their way to growth on borrowed funds. All the while, the workers caught up in the whole mess simply because they had the misfortune to work where they did, find themselve set adrift. I've had enough of being at the mercy of other people's bad management, so I'm working to start my own company. I can live with being at the mercy of my own bad management.

At least we have to right to bear arms.

The revolution will not be televised.

[Peter]

>"The $65/hr labor cost Delphi quotes..."
At GM, that term is "fully burdened overhead" (a word of art) which includes things like:
salary,
pension,
healthcare,
employer portion of taxes,
a share of amortization of building and machinery,
a share of utilities for the plant.

Everything is costed out to the 100th of a penny.

I used to work for GM when that division was called Delco Electronics. In Kokomo, there was a large steel plant (Continental, I think). In the 80s, the management basically stated "if you don't take 50% wage and benefit cuts, we'll close this plant." The unions agreed to the cuts and within a year, the steel plant was shut down putting 2500 folks out of work, while the executives split huge bonuses for reducing costs. I don't think the UAW is going to budge on the "take a 2/3 of your salary pay cut." Fool me once, shame on you, fool me twice, shame on me.

The "take a pay cut or we'll shut down the plant" has never ended up with the plant staying open. It always ends up closing. People like to claim that labor costs are high. Labor costs can't even come close to the costs of mismanagement. Companies in the US are extremely resistant to change, or learning from mistakes. Which is why software development hasn't improved much in the last 40 years: the computers are 1000s of times faster, the tools are 100s of times better, and the mismanagement skills haven't changed much. For examples of how management hasn't improved in the last few decades, I'd recommend reading the book Death March. Death Marches are the norm in corporate sofware development, not the exception.

Folks still look for fads, fashions and silver bullets to magically make their problems disappear. Part of it is our nation's distaste for education and thinking.

For example, academic research in software development runs 5-30+ years ahead of corporate/commercial software development practices. With world changing stuff taking about 10 years to go from academic paper to real-world commercial products (sample: SQL. Paper first written 1969. First commercial product 1978. Every developer uses it today. IBM spent millions to get a product out, the company now called Oracle was the first with a commercial product).

Labor-Management troubles continue in each and every industry in the US. It isn't unique to the airlines, steel or auto industries; it is every single industry. Even calling employees "associates" or "partners" doesn't cure the L/M mentality that whacks up relationships, it helps, but it doesn't eliminate the problem. I think the source of the problem is wired into our brains, and won't be solved anytime soon.

The threat of defaulting on the pension scares me, as my ex-gm/ex-delco/or-is-it-delphi pension is the only one I've got. I left that company years ago, and have never vested in any pension since then, and almost every employer since then is only interested in 401k plans. That the PBGC will (maybe) cover what my defined benefits are is slightly fear-reducing, but the way this administration robs from the poor to pay for the rich makes me think that the PBGC will go tits up in the not too distant future. Especially with the plundering and planned destruction of social security. Who knows, in 20 years, maybe my $200/month pension benefit will purchase exactly 1 happy meal at mcdonalds each month.

[lloyd667]

The issue, as far as pensions go at least, is narrower. Retirees are supposed to have a claim on the pension fund, which is supposed to be big enough to cover those claims.

Several recent bankruptcies, as well as pending ones (at GM, say) suggest that pensions are not, in fact, funded. Otherwise, why would spending on current pensioners be a drag on cash flow, and why would companies be so keen on unloading those pension obligations?

The real problem seems to be that pension supervision is too weak.

As for health care obligations, they should be fully funded like pensions are supposed to be. This would solve the "claim" problem, would it not?

[me]

"Many of the steel retirees now only have SS benefits after many of the steel companies have sunk. "

Bankruptcy Bob "steve" Miller redux.

[me]

"If you create a legal situation where there is no such thing as a 'secured lender' to troubled companies, you'll force all of them into bankruptcy."

From a workers point of view that would be ideal rather than forcing them to live with a lie and lose everything 20 years from now. Much easier to start over at 30 than 55. I know. You are saying it is not an ongoing concern unless they can screw the employees, You wouldn't be saying that if you were US Steel and they owed you money.

[douglas]

The worst part is not that these pensions plans are in trouble, but that most workers don't even have a defined benefit retirement option. It's your stagnant wages invested in a 401k in a floundering market.

[wkwillis]

When the Republicans use their political control of the economy to force someone to the wall, the next year they screw it up a notch and force them through the wall to become Democrats.
Is people losing corporate pensions a problem or a policy? Is it a problem or a solution? Because more and more people are falling out of the middle class every year.

[Slocum]

"From a workers point of view that would be ideal rather than forcing them to live with a lie and lose everything 20 years from now. Much easier to start over at 30 than 55. I know. You are saying it is not an ongoing concern unless they can screw the employees, You wouldn't be saying that if you were US Steel and they owed you money."

I'm not talking about Chapter 11 -- I'm talking about liquidation. If creditors couldn't get to be first in line, they would not lend money to keep the firms afloat before after Chapter 11. Would this be better for retirees? Doubtful. Would it be better for current employees? Clearly not.

"I know. You are saying it is not an ongoing concern unless they can screw the employees, You wouldn't be saying that if you were US Steel and they owed you money."

I know the 'evil, flinty-eyed, rapacious executive' meme is hard to pass up, but do you think that continuing on with business-as-usual is really an option for Delphi? Was it for US Steel?

How much could a saintly, altruistic CEO afford to pay Delphi factory workers this year? Next year? Five years from now? Delphi has secured financing to keep it going during reorganization. Would any lenders have signed on if the reorganization was NOT expected to include restructuring of union contracts? Would any bankrupcy judge approve a plan that planned to maintain union contracts as is?

[Esq.]

In response to Slocum:

Yes, some companies would be tossed into bankruptcy relatively quickly. That might actually result in better outcomes in the sense of successful reorganizations.

My understanding is that until fairly recently, pensions were funded with treasuries, not unstable investments in equities. Wouldn't a return to safe investments (often urged on other grounds as well) resolve the question of whether a pension is fully funded?

As to financing in a Chapter 11, DIP financing often provides for super-priorities giving the DIP financier rights superior to first in time secured creditors. There is no particular reason that a DIP financing order couldn't trump the pension. If so, then there would be no need for a liquidation in cases where a corporation could not continue in business without new financing but could not get new loans because the pensions would have priority.

The effect would be that equity would pay for current pension arrears and the Banks would pay in the future, if they did not insist on pensions being funded. It would become part of every bank's due diligence, like making sure that taxes (tax liens currently have priority) were paid. No government regulation, just a market channeled to produce the best results for all. (More than just econ grad students should be required to read Adam Smith)

[Slocum]

Esq: "My understanding is that until fairly recently, pensions were funded with treasuries, not unstable investments in equities. Wouldn't a return to safe investments (often urged on other grounds as well) resolve the question of whether a pension is fully funded?"

The market value of T-bills also fluctuates signficantly and there are no 30 year T-bills anymore, so the problem of guessing what the T-bill rate is going to be in the future remains. And then there's the problem that the real rate of return for T-bills is pretty damn low--not exactly an ideal investment vehicle for a worker who's not going to retire for another 30 or 40 years.

When you get down to it what, really, would be the effective difference between a conservative defined benefit plan invested solely in T-bills and a conservative defined contribution plan invested in T-bills where the worker turns around and buys an annuity when he retires?

If that's all you're doing with a pension plan, you may as well not bother and just have a 401K.

[save_the_rustbelt]

The problem for many of these plans is not bad investment results, but failure to inject cash based on wildly optimistic investment projections.

When cash was tight the pension was the last priority.

Remember how ERISA was going to solve thes problems?

[Esq.]

Slocum, the question is not whether the treasuries are a good investment for the employees. The question is whether a corporation is investing enough to cover the corporation's liabilities.

The liabilities are quantifiable with actuarial methods. The T-Bills simply provide an easily quantifiable way of investing to meet those liabilities, that you suggested was necessary.

Defined benefit is obviously preferable to employees because the corporation is obligated to bear the investment risk and will therefore probably have to invest more to insure payment of its liabilities.

A change to the priority scheme would induce the Banks to prohibit save the rustbelt's wildly optimistic projections by demanding realistic projections and suffcient assets to meet the liabilities or you can't borrow our money. The banks would be vastly stricter than the current weak federal oversight, with enforcement teeth, and not a federal regulatory agency capable of being taken over by the regulated.

[mwg]

Aren't "wildly optimistic investment projections" just another excuse for underfunding the pensions? That is, you overestimate the amount of money your investments will earn in order to lower the amount of money you need to put into them.

[Weco]

Just read on Bloomberg that the execs manage to weave themselves a golden paracute of 18 month redundancy compensation just days before Delphi went bankrupt. Probably don't matter in the grand scheme of things but just go to show why the company is filing for Chapter 11.

[me]

"How much could a saintly, altruistic CEO afford to pay Delphi factory workers this year? Next year? Five years from now?"

If it is 1/3 of what they are making today, minus pension and healthcare, they deserve to liquidate. How does a worker tell his baniker, well, here is 1/3 of the mortgage? do you people every read waht you write from a practical point of view?

[William]

Of course they could just offer all the current workers 20-30 bucks an hour, and ditch all their pension obligations. Plenty of people would be willing to take those jobs.

[Slocum]

"If it is 1/3 of what they are making today, minus pension and healthcare, they deserve to liquidate. How does a worker tell his baniker, well, here is 1/3 of the mortgage?"

And what better answer would the worker have for his banker if, as you suggest, the company liquidated and he lost his job entirely?

"do you people every read waht you write from a practical point of view?"

You're suggesting that a worker would be better off with no job at all than a $20 or $25 an hour job, and I'm impractical?

Or are you suggesting the worker can simply go and take another $65/hour job? Well, if he can do that, he ought to do it now and not wait for Delphi to get sorted out.

[me]

"You're suggesting that a worker would be better off with no job at all than a $20 or $25 an hour job, and I'm impractical?"

He offered 10 not 25.

Also the 65 was addressed earlier, its not 65.

Yes, i am suggesting they are better off with no job today than putting off the ineveitable. Just like steel and airlines there must be too much capacity so shut it down intead of wasting workers lives. Do you really think that United in banikruptcy 3 years now, will have employees better off? thye will just keep cutting pay and jobs.

I know victims of bankruptcy bo's heroic steel days. Widows lost their healthcare and pension. Their healthcare premium is over $800 and all she receive is under $400 social security. You people never plug real people into your equations.

This is not the American dream it is a nightmare.

[Slocum]

> "You're suggesting that a worker would be better off
> with no job at all than a $20 or $25 an hour job, and
> I'm impractical?"
>
> He offered 10 not 25.
>
> Also the 65 was addressed earlier, its not 65.

The 65 includes healthcare, pensions, vacations, employer's FICA share etc, etc -- the workers aren't taking home 65, but from the employer's perspective, it doesn't really matter whether the employee compensation is in the form of wages or benefits -- dollars are dollars.

> Yes, i am suggesting they are better off with no job
> today than putting off the ineveitable. Just like
> steel and airlines there must be too much capacity so
> shut it down intead of wasting workers lives. Do you
> really think that United in banikruptcy 3 years now,
> will have employees better off? thye will just keep
> cutting pay and jobs.

Well, I'm suggesting that the workers are better off at least having the choice between staying with a job where the wages have been cut rather than being put out on the street by liquidation. If I were giving advice to an individual Delphi production worker, I'd strongly suggest thinking about getting out and finding something else, but that's a different question.

> I know victims of bankruptcy bo's heroic steel days.
> Widows lost their healthcare and pension. Their
> healthcare premium is over $800 and all she receive is
> under $400 social security. You people never plug real
> people into your equations.

You're recommending liquidation -- that's your equation. How are the widows on pensions going to do better than with Chapter 11 restructuring? Regardless of who's running the show, Delphi just doesn't *have* the money and has no realistic prospects of *getting* the money to keep sending workers and pensioners the kind of checks they've been accustomed to.

> This is not the American dream it is a nightmare.

It is going to be a nightmare for a lot of people -- no argument there.

[me]

"How are the widows on pensions going to do better than with Chapter 11 restructuring?"

How are they worse off? Those retirees have lost everything but social security, which doesn't even cover their healthcare premium.

I am still missing how this improves the standard of living. Why not go to US Steel and tell them we don't have the moeny so we will pay you $100 per ton for steel instead of $300 per ton.

[Alex Marshall]

Slocum, you are justifying lying to employees. Hey, that's your right. Just be clear about your selective morality.